Will Unplugging Aereo Kill TV Innovation?

Two years ago, a spunky tech start-up called Aereo so shook up the major television broadcast networks that they sued it before the company even started offering its service to the public. CBS and FOX even threatened to stop sending free over-the-air broadcasts if the start-up was allowed to flourish. Now, after a bloody legal skirmish, Aereo has shut down. Last week, the U.S. Supreme Court ruled against it following a nudge from the Obama administration, which supported the networks in a friend-of-the-court brief.

Why did Aereo cause so much concern? Aereo sold a service that let subscribers watch and record over-the-air television on their PCs and mobile devices. This is the same broadcast signal consumers can get for free using TV antennas, and for which pay-TV operators shell out billions of dollars a year to get the right to retransmit on their systems. Broadcasters accused Aereo of infringing on their copyright. Aereo claimed that it merely rented access to its TV delivery system to viewers, just as if they had their own antenna and DVR at home. Thus, it did not have to pay license fees.

Aereo, founded by CEO Chet Kanojia and backed by media mogul Barry Diller of IAC, among others, positioned its service as a simple alternative to the current morass of television viewing options. “TV at the moment is complicated,” the company said in its first blog post two years ago. “Between the lackluster technology and the lack of choice and portability, there is room for improvement. So we are making our television experience simple.” For $8 or $12 a month, Aereo customers would have been able to watch and record live TV on their PCs, smartphones, tablets and other digital devices through a sleek, user-friendly interface.

Kevin Werbach, Wharton professor of legal studies and business ethics, says that Aereo saw an opportunity to serve consumers who were increasingly unhappy with their pay-TV service. “Aereo was a creative hack on a video programming market that increasingly limits and over-charges customers,” he notes.

“Aereo was a creative hack on a video programming market that increasingly limits and over-charges customers.” –Kevin Werbach

With its potential to encourage people to cancel pay-TV service, Aereo’s business also pitted it against a multibillion-dollar industry whose players include Comcast, Verizon, DirecTV, Dish Network and AT&T. While some pay-TV operators have considered the idea of creating their own Aereo-like service to avoid paying retransmission fees, they did not pursue the idea because it would complicate content relationships they have with cable networks owned by broadcasters. For instance, Disney owns ABC and sports cable network ESPN.

Aereo’s system used thousands of mini-antennas to receive over-the-air TV signals, then recorded the broadcasts and streamed them to paying subscribers. Since each viewer was assigned to one antenna, Aereo argued that its service was personal and individualized. An Aereo-like service called ivi TV used one master antenna and was shut down in 2012.

Broadcasters protested Aereo’s use of their content without paying as pay TV operators did. “The Supreme Court decision will keep the existing economic arrangements for TV in place a little while longer,” according to Werbach. Aereo and its investors have learned the hard way that the TV ecosystem is not easy to disrupt without the cooperation of those who own the TV shows and movies demanded by viewers, he notes. “Unfortunately, the very complexities and contradictions in America’s copyright and communications laws that enable opportunities for innovation can also close them off,” he adds. “Aereo’s founders and investors always knew they were taking a big legal risk.”

Some are concerned that the Supreme Court decision would not only affect Aereo, but also stifle innovation in video. “Copyright law, as it has been written and interpreted, tends to restrict innovation,” especially for those who do not have a relationship with major entertainment companies, says Mitch Stoltz, staff attorney at the Electronic Frontier Foundation, a nonprofit advocacy group that filed a friend-of-the-court brief on Aereo’s side. “The broader concern is that the approach [the court] took in [Aereo’s case] would be applied to streaming video.”

Fuzzy Reception

Knowledge@Wharton High School

When the high court ruled against Aereo in a 6-3 decision, it deviated from the language of the Copyright Act but focused on achieving a result that seemed fair, Stoltz notes. Once the court strays from a textual reading of the law, it can create uncertainty, he adds. “In a sense, independent innovators can’t rely on the words of the statute. They can’t read the statute closely and build a business” if the interpretation can fluctuate, he says. “It’s just going to be horrendously unpredictable.”

The Copyright Act gives the owner of the copyright — in this case, the broadcast networks — the exclusive right to “perform” the work, or transmit it to viewers. Congress amended the Act in 1976 to include cable TV companies as public performers of this content. As a result, pay-TV companies have to compensate broadcasters in kind or cash for the content they retransmitted.

Writing for the majority in the court, Justice Stephen Breyer said Aereo was “substantially similar” to a cable TV company, in that it sold a service that lets subscribers watch mostly copyrighted TV programs almost at the same time as they are being broadcast. As such, it was unlawfully streaming copyrighted content, even if Aereo used a different technology than pay-TV operators. “This sole technological difference between Aereo and traditional cable companies does not make a critical difference here,” he wrote. Thus, Aereo must pay up or shut down.

In reaching its ruling, the court considered two things in the Copyright Act: whether Aereo performed the copyrighted material, and whether it did so publicly, according to Shyamkrishna Balganesh, professor at the University of Pennsylvania Law School. Only copyright owners can publicly perform. Aereo argued it did not perform because its service stayed inactive until an individual initiated the viewing. It also did not believe it performed publicly because each video stream went to an individual and was not simultaneously broadcast to a group.

But the court countered that cable TV subscribers also performed an individual act; they had to change channels to figure out what to watch. “The court concluded that the mere fact that the consumer there, too, initiated the viewing didn’t change the Congress’ belief that cable television is still a performance,” Balganesh says. As for Aereo’s defense that the work was not performed publicly, the court rejected that as well, because the Copyright Act disregards temporal or spatial differences. “Even though the content is transmitted to different people at different times, that still can be a public performance under the Act,” Balganesh notes.

“The word ‘similar’ is the sort of word that legal careers are built on. I expect to see a lot of litigation on what things are similar to cable TV and what are not.” –Mitch Stoltz

Justice Antonin Scalia, writing for the dissenting members of the court, said the high court strayed from its usual textual reading of the Copyright Act and swept aside case precedent in reaching its decision. He argued that Aereo did not directly infringe on the broadcasters’ copyrighted works because it did not select content. Internet service providers carry all types of data from one person to another, whether they are copyrighted works or not. “Does that mean that the provider is directly liable when the transmission happens to result in the reproduction of a copyrighted work? It does not,” he wrote.

However, Netflix and similar companies that provide video “on demand” services have to pay fees because they actively curate a range of content for subscribers. So was Aereo more like an Internet service provider or Netflix? Neither, Scalia said. Instead, Aereo fell within a loophole in the law. But the court’s role is not to plug loopholes; Congress can do a better job of it through legislation than the “crude ‘looks-like-cable-TV’ solution the court invents today,” Scalia added. He warned of coming confusion in the courts as a result of the decision.

But Balganesh points out that judges make decisions based on “uncertain standards” all the time instead of “clear” rules. When broadcasters sued Sony over Betamax and VCR technology 30 years ago, the Supreme Court sided with the latter because those devices constituted “fair use.” That is, when individuals used the technology to record copies of programs in the privacy of their homes to view later, they were not violating the content owner’s copyright. “The fair use doctrine is a common law-like standard. It is not a clear rule,” Balganesh says. “It has worked well for quite a while now. I don’t see why it is problematic to have another standard introduced into copyright law.”

Fallout from Aereo’s Loss

But what worries Stoltz is the high court basing its ruling on Aereo’s being “similar” to cable TV. “The word ‘similar’ is the sort of word that legal careers are built on. I expect to see a lot of litigation on what things are similar to cable TV and what are not,” he notes. For instance, some networks could argue in court that cloud computing is similar to cable TV. “When an entity communicates images to multiple people, it transmits a performance to them,” he says. “If you just go by that [definition], any cloud storage or cloud computing platform … is potentially in trouble if they stream the same TV episode to two different people.”

But Balganesh notes that the court took great care to make sure its ruling would not extend to cover a broader set of technologies. Indeed, it was unusual for the court to go to such lengths to “cabin its ruling to a specific technology,” he adds. In the majority opinion, the court outlined some exceptions to its ruling: in cases where the user owns or possesses the content and directs its use; where the “fair use” doctrine applies; when the user pays primarily for storing, not transmitting, data, and where the transmission does not travel to a substantial number of people outside one’s family or social circle. “Cloud” storage likely falls under these exceptions.

Indeed, to allay the fears of innovators, Justice Breyer wrote that “we do not believe that our holding today will have [the] effect” of discouraging the emergence of new technologies. Moreover, some have argued that Aereo did not come up with an innovative technology — as the VCR was in its time — but instead put together an inventive system and business model to stream live TV to digital devices.

“Aereo was innovative, though that innovation seemed to [relate] more [to] the way they did an end run around regulation than creating a new kind of product.” –Ethan Mollick

“Aereo was innovative, though that innovation seemed to [relate] more [to] the way they did an end-run around regulation than creating a new kind of product,” says Ethan Mollick, Wharton professor of management. He likens Aereo to a “loophole start-up,” a company that devises a “clever way of getting at an obvious opportunity that is clearly against the letter or the spirit of the law.” These companies are innovative, but not in a way that “significantly advances the economy,” he notes. “At best, they provide insight into what laws need to be reconsidered, but it is hard to believe that they do much true innovation.”

Dennis Wharton, a spokesman for the National Association of Broadcasters, argues that the ruling does not stifle innovation in TV. He notes that the industry itself innovates constantly. “Plenty of broadcasters are offering online, Aereo-like services to the public. Each individual broadcast network has streaming services,” Wharton notes. “Collectively, several networks created [online video site] Hulu, and local TV stations are the most popular online destination websites for local news.” Aereo, he adds, tried to stream content it did not own, and broadcasters acted to protect their copyrighted works.

But according to Werbach, owning a copyright could turn into a “club that smashes innovation” in technology-driven industries. “The Supreme Court made it clear that it intended its decision to be limited to services just like Aereo, but its ruling still creates an opportunity for content owners to push more expansive interpretations,” he says. “Some content owners take a maximalist position on copyright, which constantly pits them against technology companies seeking to innovate with network-based services.”

Ultimately, what may be lost is the consumer’s ability to benefit from independent innovation, Stoltz notes. While cable companies, broadcasters and movie studios are coming up with new technologies, these are all tied to the bottom line of major media companies. “What’s missing is any sort of innovation that threatens them, that could benefit the consumer,” he notes. “We’re going to get sustaining innovation, not disruptive innovation.”

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